Second Order Effects of the Public Option - An Economist's Perspective

I got into a recent discussion with a first order thinker.  A first order thinker is someone who sees only the initial effects of a decision and fails to look two to three or more chess moves away.  The discussion was regarding the public option in Obamacare.  I thought I would share my short response to the individual here.

Sure a public health insurance plan would provide low cost health insurance to people in need.  That first order effect is good.  However, in previous posts I have discussed the second and third order effects of how low cost health insurance incentivizes excess medical care costs.  Please see my last few blogs on health care.  I won't waste time on that here.

If the government option stays in, business will have the option to pay a fine or provide health insurance.  So far, that fine appears to be lower than the cost of healthcare for most business.  These businesses would be incentivized to cut their costs to be competitive and would just pay the fine, not providing healthcare.  This impacts both the providers of healthcare and the health insurance business and its remaining customers.

The effect on healthcare providers:  This would significantly push many people in the private health insurance market to the public option.  Since the "public option" would really be a government run business, they would, as they have with Medicare and Medicaid, fix the price low, similar to rent control.

Typically when a price is forced low, the supply of individuals willing to provide the service at that controlled price falls and the demand grows (in the case of healthcare paid by the government - free, that demand grows exponentially).

With the lower price from Medicaid and Medicare, physicians and healthcare people have been able to shift costs to people with private insurance, thus making up for the loss from the lower fixed revenue from government payers.  This approximates the real set price, and thus the supply of providers has not taken the same hit, as rental unit supply in cities with rent control.  For more on the problems this has caused the heath care system see the blog below. 

However, if the pool of individuals on the forced lower rates grows and the pool of people on the private insurance companies falls, the ability to shift costs will dramatically effect the overall revenue produced in the business and thus will significantly impact the supply of people willing to provide heathcare at the new reimbursement rates forced by the government payers.

The cycle would further spiral out of control due to the impact on private insurance.  As fewer people purchase private insurance, and as costs are further shifted to them, the price for insurance will continue to skyrocket.  As this happens more people will bail to the public option, further driving the spiral. 

It is not difficult to envision, with a little common sense, the end result of the public option as it is currently written is single payer system.  Which, interestingly enough, President Obama has been video taped articulating as his ultimate goal.

A Plan For Fixing Health Care

Several people have asked me to put my thoughts on Obamacare and the current healthcare situation in the US in a single blog.  This is an effort to summarize my thoughts and share my solution for phase one of fixing the current problems.

Most Americans want to help the disadvantaged and the elderly acquire quality healthcare.  No one argues that the current system is not broken.  Yet the solutions being discussed now all fall prey to the same underlying principles, which led to our current healthcare crisis. 

There are primarily three major issues with the current US Healthcare system.  The first is inherent in the basic human response to incentives.  Another is the impact of government price fixing and it's impact on health insurance.  Lastly, defensive medicine is adding costs to those who ultimately pay the price for everyone's health program.

When government or any entity picks up the cost of someone's healthcare, the result is a lack of concern for costs.  People become incentivized to spend.  In many cases, they spend well beyond what they would be willing to pay themselves even if they had the resources.  With no cost barrier, and as the supply demand curve of economics 101 shows, demand exponentially increases as the price falls.  At zero price, or free, demand is infinite. 

Concomitantly, the supply curve falls leading to a significant shortage.  Or, in other words, when there is no cost barrier, there is no end to the demand.  With unlimited demand, there is no supply that can ever meet the demand.

The evidence of this is easy to find by looking at a healthcare system where 100% of people are covered for "free.".  In England, mortality rates for most diseases significantly exceed the US.  Two examples are prostate cancer, mortality is 19% in the US and 56% in the UK, and mortality for breast cancer in the US is 25% while in the UK it is 46%.¹  As demand exceeds supply rationing, or whatever politically correct word you chose, must occur.  The consequence is a system where screening occurs later in life.   Early detection is essential to cure in nearly everything.  A shortage of caregivers will lead to increased mortality and poor quality. 

Current abuse of the emergency department and other visits to physicians for conditions that our grand parents would treat on their own is taxing the system substantially.  Much of the increased costs in our current system are due to unnecessary visits.  For those on "free" or low cost systems, there is no incentive to save, and again no supply that can ever meet the demand.

An additional problem to the current system is the effect on health insurance and other payers when government sets the price so low.  When Medicare and Medicaid say, we will only pay X for this procedure, and X is substantially below the market equilibrium price, one of two things happens.  Either providers stop doing that service, or in economic terms stop supplying that service at the set price.  Or, they increase the price charged to others, a process called cost shifting. 

The effect of cost shifting has devastated the Health Insurance Industry.  As the government pays less, physicians, hospitals and other healthcare entities raise the price for others leading to increased cost of care for those with health insurance.  This increase is then in turn passed to their customers in increased cost.  As the cost escalates, fewer people can purchase health insurance leading to a need for insurance companies to increase prices further.  What followed was a vicious cycle and put us where we are today.

There is a tendency to place the blame on health insurance profits and their executive salaries.  I often as a physician have fallen into that trap only to catch myself.  It is an easy fallacy to get into.  But if you look at Kroger Foods, a company that supplies...food, its net income was $1.18 billion dollars and the CEO was paid $2.78 million.²  How is healthcare so much more essential than food?  Why is the standard any different?  Health insurance reforms of the late 1980's and early 1990 lead to significant reductions is cost as they regulated the use of expensive medications and procedures.  Their involvement in healthcare has decreased not increased costs.  Cost shifting because the government forcibly set the price low is the primary cause of the problem.

Essentially, with Medicare and Medicaid price fixing, the free market in healthcare is dead.  The free market will drive price down for everyone.  LASEK is an excellent example.  LASEK involves a very precise "laser," trimming microns of cornea to reshape the cornea and focus the image on the retina. Health insurance and government medical care do not cover the price of this procedure. Meaning true market forces are setting the price. What has happened? When LASEK was introduced it cost $5,000 to $6,000 dollars. I saw an ad yesterday for LASEK for $499 per eye. Granted the average LASEK procedure is roughly $1,800 dollars, but even this amount is significantly less than where it started. As ophthalmologists competed for the dollars people were willing to spend, the price fell. This year's average was less than last year's. This decrease in the average cost of a surgical procedure on the eye happened in the face of an increase in healthcare costs that was twice the rate of inflation.

An added dimension to the impact this has is the simple fact that health insurance companies are not allowed to compete across state borders.  Meaning BlueCross/Blue Shield operates offices in each state with added costs of doing so.  And with a limited number of competitors, there is no incentive to the insurance companies to reduce costs.  Lifting the ban on interstate competition would significantly incentivize insurance companies to reduce their costs.  Wal-Mart is an excellent example of a company able to decrease costs, and continue to profit because of volume.

We need to compel the government to stop fixing the price.  The free market will adjust itself and with competition find a price at a supply demand equilibrium point.  Great examples are rent control.  Whenever states repeal rent control laws, the supply of housing increases and the price actually falls.  This new healthcare equilibrium price will no doubt be significantly less than what the insurance companies are providing.  This will, with allowed competition, significantly decrease the price of health insurance and thus increase the pool of people able to afford it.  And with appropriate incentives detailed below, would decrease the misuse and thus cost of unnecessary medicine.  This would free government dollars to pay the slightly higher market price for necessary procedures.

Liability reform is a major area for saving billions of dollars. No one wants to be sued. In some states, like Florida, three suits and you lose your license; there is a defined limit on the number of lawsuits you are allowed. Further, who wants to endure the costs in life sacrifice and money to get through medical school only to lose it all in a single settlement? A recent lawsuit paid a patient $60 million dollars when the plastic surgeon botched her thigh lift.³ Frivolous lawsuits and exorbitant awards cost providers and their insurance companies millions of dollars in insurance premiums. Those costs are forwarded on to the patients in increased healthcare costs and thus increased insurance premiums. But what does it do to the doctors? We go crazy ordering CAT scans and labs to make certain that once we are on the stand, we can say we did everything we could. Those additional studies intended to keep my colleagues and I out of the courtroom, are the heart of defensive medicine.

In a recent poll of emergency physicians, 65% said that they could save over $500 per 8-hour shift by decreasing unnecessary tests as a part of their defensive practice. Another 16% felt they could save between $200 and $500 dollars.⁴ I run a fairly large Level 2 trauma center that will see 75,000 patients this year. I staff it with 9, 10 and 12-hour shifts a day. If we assume a conservative savings per shift of $400 dollars, less than a single CAT scan, then in my emergency department alone, stopping the defensive practice of medicine would save (365 x 9 x $400) $1,314,000.00. There are over 5,000 emergency departments in the country.

But how can you have a government run program to help people who need assistance, and yet allow free market practices set the price?  The government already has a program in place that does just that. 

The food stamp program, now called the Supplemental Nutrition Assistance Program, or SNAP, is where 31.5 million Americans receive assistance to purchase food. This program is an excellent paradigm for healthcare. People who qualify are given a debit card and allowed to purchase the food they desire. The market price for food remains unchanged for the most part because the consumer is choosing how to allocate the resources he or she has. The consumer recognizes there is a limited amount and thus chooses prudently on how to spend the money. If they foolishly buy filet mignon, they have little to nothing else for the remainder of the month.

Healthcare credits via a debit card would place the decision-making back in the hands of the consumer. We have the actuarial data and can calculate the exact amounts needed to be kept in reserve for catastrophic care.  The money used for routine visits as well as non-emergent use of the emergency department can be allocated to the health debit cards.  The government would issue qualifying personnel a set amount yearly in conjunction with a catastrophic health plan. The individual would chose to save money by waiting to go to a primary care doctor instead of an emergency department and thus have money remaining for preventative care should they desire it. The individual has a choice, the market forces of supply and demand are thus reinstated and assuredly the right price will surface. As more people pay for their care, and make wise choices in regards to their care, cost shifting will stop and, for competition's sake, could even reverse itself.

Additionally, other incentives would include, all unused healthcare credits at year end could roll over into an IRA, or other vehicles which further incentivize the individual to not abuse healthcare, specifically the emergency department for routine care. Or, the unused amount could be applied for at tax time much like an earned income credit or child credit is received.  With the financial incentive to decrease the cost of a person's healthcare, some people would decrease their risk as well, eating better and perhaps ending a nicotine habit. Why not, if they don't get sick, they get the financial reward.

This system reverses the current incentive to spend regardless of the cost.  It would remove the government from price fixing and thus allow the market and competition to push the price down.  Lastly, coupled with real tort reform, physician defensive practices would decrease and significantly enhance savings.  What are we waiting for.

Mark

1Healthcare Here and Over There, Investor's Business Daily.http://www.ibdeditorials.com/IBDArticles.aspx?id=334968219359127

2http://finance.yahoo.com/q/pr?s=KR

3"Defensive Medicine is Real," Emergency Medicine Physician Monthly, volume 16, number 9, September 2009. Page 22.

4"What Emergency Physicians think about health care reform," Emergency Medicine Physician Monthly, volume 16, number 9, September 2009. Page 24.

Jimmie Carter Strikes Again

SEP 18, 2009

Those of you who have followed my blog since its inception may recall my very first blog, Obama's Panama Canal. In April of this year only a few hours after Kim Jung Il launched a rocket over our ally Japan, President Obama offered to destroy all our nuclear weapons. Similar to Carter, Obama promised to leverage our strategic advantage against a promise of peace. Giving up our nuclear strategic advantage is lunacy. Believing that articulating such a stance, bullies like Kim Jung Il, and Mahmoud Ahmadinejad are going to suddenly become peaceful is equally ridiculous. Mahmoud Ahmadinejad has done nothing but thumb his nose at Obama's gestures and Kim Jung Il continues to defy UN Sanctions.

So what does President Obama go and do to top that one? He cancels a missile defense system set for deployment in Poland and the Czech Republic. Here are just a few headlines from this week's news related to this topic. I think they say it all.

September 12 CNN.com: Venezuela bought Russian arms, Chavez says as trip continues¹

September 15 Daily Times: Russia helping Venezuela develop nuclear energy²

Sept 17 The Economist: Venezuela's foreign policy - Dreams of a different world³ [A quote from this article - "Mr Chávez told Le Figaro, a French newspaper, that he had clinched a deal on nuclear co-operation with his Iranian counterpart, Mahmoud Ahmadinejad."]

September 17 Times Online: Dismay in Europe as Obama ditches missile defence⁴

September 18 Associated Press: Poles, Czechs: US missile defense shift a betrayal⁵

September 18 Reuters: Iranian president raises stakes against Israel⁶ [A quote from the article - "This regime (Israel) will not last long. Do not tie your fate to it ... This regime has no future. Its life has come to an end," he said in a speech broadcast live on state radio."]

September 18 guardian.com IAEA secrete report: Iran worked on nuclear warhead - 'Secret Annexe' to UN nuclear inspection agency report reveals Iran has 'sufficient information to make a nuclear weapon7

So let's break this down. In the face of Vladimir Putin giving Chávez weapons, missiles, and nuclear technology, the Unites States pulls back its defensive missile shield protecting European Allies and us. On the day he briefs the world on pulling these missiles out, a report leaks from the Atomic Watch Dog organization saying Iran's capability to build a nuclear bomb is greater than we thought. And a day later, the psychopathic leader of Iran again threatens to destroy Israel.

I think it is insulting for the President to say the "intelligence" data caused us to change our plans. Come on, Iran has put a satellite into space for goodness sake. They have the missile technology.⁸ We all know that if Russia had not been so vehemently opposed to this, the system would have deployed on schedule.

And to top it all off, guess what happened 70 years ago yesterday? That's right, the US President decided to announce that he was taking back the promised missile defense system from Poland, on the 70th anniversary of Russia's Invasion of Poland.⁹ It's almost too hard to believe. But what can you expect from a Narcissist who gives the Queen of England an iPod loaded with his speeches. It's getting to the point where it is difficult to believe these actions, which are leading to a global weakening of America, are accidental. No one is this dumb.

¹http://edition.cnn.com/2009/WORLD/americas/09/12/venezuela.chavez.home/

²http://www.dailytimes.com.pk/default.asp?page=2009%5C09%5C15%5Cstory_15-9-2009_pg4_7

³http://www.economist.com/world/americas/displaystory.cfm?story_id=14460201

⁴http://www.timesonline.co.uk/tol/news/world/europe/article6838058.ece

⁵http://www.google.com/hostednews/ap/article/ALeqM5iWR-3rEXusvVBWlZ-74ZbnZbKlZAD9APVE2O0

⁶http://in.reuters.com/article/worldNews/idINIndia-42553620090918

⁷http://www.guardian.co.uk/world/2009/sep/18/iran-nuclear-warhead-iaea-report

⁸http://news.bbc.co.uk/2/hi/middle_east/7866357.stm

⁹http://en.wikipedia.org/wiki/Soviet_invasion_of_Poland

A Public Option? No, Public Assistance? Absolutely!

A friend who is reading my blogs told me he appreciated my comments on defensive medicine but implied disagreement with me stating he believed there needed to be a public option for healthcare.

If I have not thus far made it clear, I want to do so now. I am for government assistance to needy persons for health care. If you read my blog on the SNAP program below you will see it is not government assistance I want to do away with, but government price setting. With Medicaid and Medicare, the government sets the price too low causing cost shifting to insurance companies, which then results in higher premiums and fewer people able to afford insurance. As the pool of people paying insurance decreases the premiums must go up further and the spiral continues.

We must help the poor fund their healthcare. But we must do it in a way that keeps the government from disrupting the market forces. Please see my blogs on comparing healthcare and rent control. The free market will set the price lower.

Look at LASIK eye surgery. Health insurance and government medical care do not cover the price of this procedure. Meaning true market forces are setting the price. What has happened? When LASIK was introduced it cost $5,000 to $6,000 dollars. I saw an ad yesterday for LASIK for $499 per eye. Granted the average LASIK procedure is roughly $1,800 dollars, but even this amount is significantly less than where it started. As ophthalmologists competed for the dollars people were willing to spend, the price fell. This year's average was less than last year's. This decrease in the average cost of a surgical procedure on the eye happened in the face of an increase in healthcare costs that was twice the rate of inflation.

I truly believe something similar to the Food Stamp program would be ideal for healthcare. The consumer would make the decisions and the price would be set where market forces would put the price. Every time government rent control (which forcibly set the price lower for housing leading to cost shifting) has been lifted, the supply of housing increased and the price fell to affordable levels. Government intrusion by setting a price for services lower does not work in housing or in medicine.

Some might point out that currently health insurance and managed care companies are prevented from really competing in the market. That is true, and is significantly contributing to both cost and thus the lack of affordability. The government prevents companies from competing across state borders. There are some 1300 insurance companies in the United States, but in one district in California only 6 are allowed by the government to offer services. The redundancy of Blue Cross Kentucky and Blue Cross Tennessee and Blue Cross Alabama, you get the point, is an astronomical overhead cost forced on the insurance companies by...you guessed it, the federal government.

Allowing the insurance companies to compete across state lines would significantly reduce the costs of health insurance and would lead to more people affording health insurance. This is just another example of how government inserts itself into the free market and makes the situation worse.

We need to help poor families afford healthcare by taking actions that reduce their costs by allowing the free market to set the price, and where necessary provide them a method to pay for services and chose the type of care they want. The SNAP food stamps debit card like healthcare system with a catastrophic back up plan is, I believe, a viable alternative. It allows consumers to make the choice and incentivizes people to not abuse the healthcare system, especially if there is a pay back of saved revenue. We must act soon.

A Great Video From You Tube on Healthcare

Gang, take a look at this video on YouTube.

Mark

http://www.youtube.com/watch?v=G44NCvNDLfc&feature=player_embedded

Just The Facts, Ma'am

So what are some of the facts regarding socialized medicine? Here are just a few facts as reported by an economic development company based in France that supports international trade. The Organization for Economic Cooperation and Development, or OECD is a 300 million dollar plus company with business interests in 30 countries.

The OECD points out some differences between the socialized healthcare system of Great Britain and that of the United States.

Great Britain's heart attack fatality rate is 20% higher than the United States.

Great Britain only does 21.3% of the cardiac catheterizations per capita than we do in the US.

Great Britain's National Institute for Health ruled that two drugs shown to increase life in breast and stomach cancer couldn’t be used.

Mortality rate due to breast cancer in Great Britain: 46%. Mortality rate due to breast cancer in the US: 25%.

Mortality rate due to prostate cancer in the US is only 19%. In England it is 56%.

Here are a few other notables from other sources.

According to Scott Atlas of the Hoover Institution, British patients wait about twice as long as Americans — sometimes more than a year — to see a specialist, have elective surgery such as hip replacement or get radiation treatment for cancer.

The rate for Colorectal cancer is 40% higher in Britain than in the US. In the US we recommend people begin screening at age 50. In the UK they begin screening at age 75.

David Gratzer, a physician and senior fellow at the Manhattan Institute, notes that a clinical oncology study of British lung cancer treatment found that 20% "of potentially curable patients became incurable on the waiting list."

Yeah! Go Socialized Medicine!!!!

Taken from: Healthcare Here and Over There, Investor's Business Daily.http://www.ibdeditorials.com/IBDArticles.aspx?id=334968219359127

The Costs of Defensive Medicine

As I mentioned in a previous blog, current Obamacare supporters refuse to consider the impact of liability reform. The President even said there would be no consideration for liability reform and none of the plans in writing now contain a word about liability reform.

The problem is, that liability reform is a major area for saving billions of dollars. For me as a practicing emergency medicine physician I see two major costs to the defensive medicine that now pervades our healthcare system. First, let me explain what is probably simple to most, but is relentlessly ignored by politicians supported by trial lawyers: why physicians practice defensive medicine.

No one wants to be sued. In some states, like Florida, three suits and you lose your license; there is a defined limit on the number of lawsuits you are allowed. Further, who wants to endure the costs in life sacrifice and money to get through medical school only to lose it all in a single settlement? A recent lawsuit paid a patient $60 million dollars when the plastic surgeon botched her thigh lift.^A Frivolous lawsuits and exorbitant awards cost providers and their insurance companies millions of dollars in insurance premiums. Those costs are forwarded on to the patients in increased healthcare costs and thus increased insurance premiums. But what does it do to the doctors? We go crazy ordering CAT scans and labs to make certain that once we are on the stand, we can say we did everything we could. Those additional studies intended to keep my colleagues and I out of the courtroom, are the heart of defensive medicine.

So, what do they cost? A single CAT Scan of the abdomen and pelvis costs the patient or insurance company anywhere from $1,000.00 to $2,700.00. A single CAT scan of the head costs around $600.00. Providers often order studies that they know, or are fairly certain would be negative when considering the clinical presentation and the physical exam. The financial costs of this are staggering.

In a recent poll of emergency physicians, 65% said that they could save over $500 per 8-hour shift by decreasing unnecessary tests as a part of their defensive practice. Another 16% felt they could save between $200 and $500 dollars.^B I run a fairly large Level 2 trauma center that will see 75,000 patients this year. I staff it with 9, 10 and 12-hour shifts a day. If we assume a conservative savings per shift of $400 dollars, less than a single CAT scan, then in my emergency department alone, stopping the defensive practice of medicine would save (365 x 9 x $400) $1,314,000.00. There are over 5,000 emergency departments in the country. And I can only speak for emergency medicine. What about surgeons? Family Medicine?

But there are other costs besides the added tests. If a patient has a lesser paying insurance company, especially the government payers like Medicare and Medicaid, many physicians will not see them because that third party payer's rate of reimbursement is so low, it does not cover the costs of practicing defensive medicine. You may have 6 neurosurgeons in town but none to remove your tumor because they don't take your insurance. The cost of defensive medicine then has to also be measured by the number of people who cannot access care. While this is mostly a human cost of people not getting care, it is often also financial because the decreased access to primary care forces people to the e.r., where care is mandated by the government despite the person's ability to pay. As I mentioned in a previous blog, the costs of unpaid e.r. visits are shifted to others increasing the cost of health insurance and further decreasing the pool of people who can afford the insurance.

Any discussion of revising healthcare in America must include the incredible costs of defensive medicine brought on by our current liability practices. The only way Obamacare supporters, funded by trial lawyers, will ever consider liability reform, is when the outcry of the American people reaches a level they can not ignore. So, do your part and pass on this blog and all others that address the issue.

Thanks, Mark

^A"Defensive Medicine is Real," Emergency Medicine Physician Monthly, volume 16, number 9, September 2009. Page 22.

^B"What Emergency Physicians think about health care reform," Emergency Medicine Physician Monthly, volume 16, number 9, September 2009. Page 24.